Download Monopoly 1

University of California, Berkeley
ECON 100A Section 109, 112
Spring 2008
Monopoly 1
I. Single-Pricing Monopoly
Monopoly, as in its common usage, refers to the situation where there is only one seller in
the market. The punch line is a monopolist set the price for its output. The most basic
pricing scheme is to set price to the maximum amount consumers are willing to pay for
the output, which is given by the demand curve. So
R (q ) = p (q ) ⋅ q
where p(q) is the inverse demand, which is simply the demand curve expressed in the
form of price as a function of quantity. As in perfectly competitive supply we look for
MR = MC
For linear demand it is easier to understand through a diagram:
Tip 1:
MR curve is a straight line with the same vertical intercept as demand and half
the horizontal intercept.
Tip 2:
Equilibrium price is the mid-point/average of the vertical intercept of demand
and marginal cost at equilibrium quantity.
There is no simply supply curve for monopoly. This is due to the monopolist’s ability to
set its own price.
II. Price Discrimination
If the monopolist has more information about the consumers it can do better than single
pricing. After break we will consider three types of pricing schemes called price
discrimination—the price paid by different consumers are not the identical.
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